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Product Market Competition and Agency Costs

Author

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  • Baggs, Jennifer
  • de Bettignies, Jean-Etienne

Abstract

We model the effects of product market competition on agency costs, and develop two main empirical predictions. First, competition, by reducing agency costs, unambiguously increases the importance firms place on quality improvements. This leads to higher powered incentives, and in turn to increased effort and quality. Second, these effects are increasing in the severity of agency problems, and should be stronger in large, hierarchical corporations (where agency problems are more severe) than in entrepreneurial firms. We test the predictions of our model using a unique dataset with both firm and employee characteristics.

Suggested Citation

  • Baggs, Jennifer & de Bettignies, Jean-Etienne, 2006. "Product Market Competition and Agency Costs," Analytical Studies Branch Research Paper Series 2006287e, Statistics Canada, Analytical Studies Branch.
  • Handle: RePEc:stc:stcp3e:2006287e
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    File URL: http://www5.statcan.gc.ca/olc-cel/olc.action?ObjId=11F0019M2006287&ObjType=46&lang=en&limit=0
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    References listed on IDEAS

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    1. Caves, Richard E, 1980. "Industrial Organization, Corporate Strategy and Structure," Journal of Economic Literature, American Economic Association, vol. 18(1), pages 64-92, March.
    2. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    3. Jean-Etienne de Bettignies, 2004. "Product Market Competition and the Boundaries of the firm," Econometric Society 2004 North American Winter Meetings 248, Econometric Society.
    4. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    5. Green, Alison & Mayes, David, 1991. "Technical Inefficiency in Manufacturing Industries," Economic Journal, Royal Economic Society, vol. 101(406), pages 523-538, May.
    6. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
    7. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, September.
    8. Haskel, Jonathan, 1991. "Imperfect Competition, Work Practices and Productivity Growth," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(3), pages 265-279, August.
    9. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    10. Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers W01/12, Institute for Fiscal Studies.
    11. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
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    Citations

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    Cited by:

    1. Evangelia Chalioti, 2015. "Incentive contracts under product market competition and R&D spillovers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 305-328, February.
    2. Ester Manna, 2013. "Intinsically Motivated Agents: Blessing or Curse for Firms ?," Working Papers ECARES ECARES 2013-37, ULB -- Universite Libre de Bruxelles.
    3. Kira R. Fabrizio & Nancy L. Rose & Catherine D. Wolfram, 2007. "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency," American Economic Review, American Economic Association, vol. 97(4), pages 1250-1277, September.
    4. Sue-Fung Wang & Yow-Jen Jou & Ke-Chiun Chang & Kun-Wei Wu, 2014. "Industry Competition, Agency Problem, and Firm Performance," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 76-93, December.
    5. Ahmed Ennasri, 2010. "Incitations Managériales et Concurrence : Synthèse de la Littérature," Studies and Syntheses 10-03, LAMETA, Universtiy of Montpellier, revised Oct 2010.
    6. Can Erutku, 2016. "Competition and Agency Cost," Economics Bulletin, AccessEcon, vol. 36(2), pages 634-639.
    7. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
    8. Lacetera, Nicola & Zirulia, Lorenzo, 2012. "Individual preferences, organization, and competition in a model of R&D incentive provision," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 550-570.

    More about this item

    Keywords

    Employment and unemployment; Hours of work and work arrangements; Labour; Wages; salaries and other earnings;

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